Hong Kong, June 03, 2021 -- Moody's Investors Service has affirmed Tencent Holdings Limited's (Tencent)
A1 issuer rating and senior unsecured rating, and (P)A1 senior unsecured
medium-term note (MTN) program rating.
The rating outlook remains stable.
"The affirmation of Tencent's A1 ratings reflects its strong financial
profile, large customer base and a track record of monetizing value-added
services offered on its online and mobile platforms, which have
helped sustain free cash flow generation," says Lina Choi,
a Moody's Senior Vice President and Lead Analyst for Tencent.
Moody's expects Tencent to maintain low debt leverage, strong
cash position and a prudent approach to investments and acquisitions.
These factors could provide it with a buffer against regulatory uncertainties,
which have heightened due to recent antitrust regulations introduced by
the State Administration for Market Regulation (SAMR).
Apart from a strong financial profile, Tencent also has a track
record of working with regulators, resolving differences and making
changes without negatively affecting its business profile.
Moody's will continue to monitor the development and assess the
impact as needed.
RATINGS RATIONALE
Tencent's A1 issuer rating reflects the company's position as a leading
provider of value-added services (VAS) in PC and mobile online
games, communication and social, digital content and mobile
payment services in China (A1 stable).
The rating also considers Tencent's strong financial profile,
characterized by low leverage and consistent free cash flow generation,
as its business scope broadens and revenue sources diversify.
Tencent's ratings are constrained by three key factors: (1)
operating challenges in the internet industry, given rapidly changing
consumer preferences; (2) the need for Tencent to develop and invest
in new products and services, which entails significant capital
investments in research and development (R&D) and marketing over the
long term; and (3) heightened risks relating to the recently introduced
anti-trust regulations.
Moody's expects Tencent's revenue to continue benefiting from an
accelerated digitalization of businesses and consumer activities,
generating strong cash flow to support its investment needs over the next
12-18 months. Its strong financial profile, supported
by steady free cash flow generation and a prudent financial policy,
provides a buffer against potential challenges from heightened regulatory
risks.
Moody's forecasts Tencent's revenue will increase by around 20%
annually over the next 12-18 months, supported by stable
growth across its various business segments. Tencent's revenue
growth has been driven by a strong expansion in its online and smart phone
games business. The online games segment revenue rose 36%
year on year in 2020, reflecting benefits from the increased amount
of consumer time during the pandemic.
Moody's projects EBITDA margins will gradually moderate to 33%-35%
over the next 12-18 months as Tencent continues to diversify its
revenue sources with nongaming services. Nevertheless, Tencent's
total EBITDA will continue to grow by 10%-15% a year
over the same period.
In addition, Moody's expects Tencent's leverage to stay
below 2.0x over the next 12-18 months because of steady
earnings growth and investment needs to support its business growth.
Tencent's leverage — as measured by adjusted debt/EBITDA —
was steady at around 1.5x as of 31 December 2020.
These projected ratios continue to place Tencent's ratings appropriately
at the A1 level.
Tencent's liquidity position remains excellent. As of 31 December
2020, the company held cash and cash-like resources of RMB227.9
billion, including term deposits and treasury investments of RMB75.1
billion. Tencent's liquidity far exceeded its short-term
debt of RMB18.1 billion (including the current portion of its lease
liabilities), capital expenditure and investment needs.
Tencent's ratings also take into account the following environmental,
social and governance (ESG) factors.
Social risks that Moody's considers in Tencent's credit profile include
data security. This risk is considered moderate although the company
processes large amounts of confidential personal information and other
types of sensitive records, which could increase legal, regulatory
or reputational risks in the event of a cybersecurity breach. Tencent
deploys advanced technologies to safeguard users' data security.
The company complies with legal and regulatory requirements for the collection,
processing, retention and protection of data. Tencent's network
and data security management measures are certified by the International
Organization for Standardization (ISO), which is an independent,
non-governmental organization with a membership of 164 national
standards bodies. Based on Tencent's 2020 annual report,
the company has stipulated rules on the collection and use of user's personal
information and publicize the rules in the places and websites where it
operates or serves. Tencent also has a dedicated privacy team within
the Legal Department, which is responsible for handling data protection
matters.
Recent antitrust regulations introduced by SAMR have heightened regulatory
risks. The regulations aim to encourage competition and could limit
large internet platforms, potentially affecting Tencent's
revenue and earnings growth.
From a governance perspective, Tencent operates with a variable
interest entity (VIE) structure, and the main VIEs (onshore operating
companies) that generate cash flow are controlled by Ma Huateng,
one of the company's founders and an 8.4% shareholder as
of the end of 2020. However, Moody's also considers
Tencent's diversified shareholder base, a balanced board composition
featuring a majority of independent nonexecutive directors and the company's
long history as a listed and regulated entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Tencent's consistently solid revenue and EBITDA
growth, and the company's proven ability to maintain a strong
credit profile while expanding its business. In addition,
Moody's expects the company to maintain discipline in its financial
management to keep its debt leverage stable while pursuing business growth.
Upward rating pressure will be limited in the near term because Tencent's
rating is already at the same level as China's sovereign rating.
Tencent conducts most of its operations and activities in China.
Downward rating pressure could emerge if Tencent (1) experiences a sustained
erosion in its active user base, which leads to lower cash flow
on a sustained basis; (2) engages in aggressive acquisitions that
strain its balance-sheet liquidity or raise its overall risk profile;
(3) adopts an aggressive dividend policy that weakens its balance-sheet
liquidity or (4) there is evidence of cash leakage to its parent or related
companies. ; or (5) demonstrates a weaker credit profile.
Specifically, the ratings could be downgraded if Tencent's
debt/EBITDA trends toward 2.0x and free cash flow turns negative
with a large net debt position, all on a sustained basis.
Moody's will also monitor for any sustained deterioration in its adjusted
retained cash flow/debt, which has remained at around 45%-60%
since 2015.
Furthermore, adverse developments in China's regulatory regime,
which could affect company's operations or business model,
would be negative for the ratings.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Tencent Holdings Limited (Tencent) is a leading provider of internet VAS
in China. The company operates leading communication and social
services, online game platforms and digital content, including
news, video, music and literature. The company has
three main streams of revenue: VAS, online advertising and
FinTech and Business Services.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
